The International Monetary Fund (IMF) forecast in its latest World Economic Outlook, published on Tuesday, that global growth will bottom out at 2.8 percent this year before rising modestly to around three percent in 2024. This represents a 0.1‑percentage‑point decline from its January projections. Global inflation is also heading down, indicating that the tightening of monetary policy through major interest‑rate hikes is bearing fruit, albeit more slowly than initially anticipated. The IMF’s Director of Research noted that inflation is expected to fall from 8.7 percent last year to seven percent this year and 4.9 percent in 2024.
Pierre‑Olivier Gourinchas said the gradual global recovery from both the pandemic and Russia’s invasion of Ukraine “remains on track,” with China’s reopened economy rebounding strongly and previously disrupted supply chains unwinding. He explained that this year’s economic slowdown is concentrated in advanced economies, especially the Eurozone and the United Kingdom, where growth is expected to fall to 0.8 percent and –0.3 percent respectively before rebounding to 1.4 percent and 1 percent. In contrast, despite a 0.5‑percentage‑point downward revision, many emerging‑market and developing economies are picking up, with growth accelerating to 4.5 percent by the end of 2023 from 2.8 percent at the close of 2022.
The IMF Director, who also serves as Economic Counsellor, warned that recent instability triggered by the collapse of Silicon Valley Bank and other institutions shows “the situation remains fragile. Once again, downside risks dominate and the fog around the world economic outlook has thickened.” He said inflation remains stubbornly high, more than markets expected, while the recent decline in inflation is mainly due to falling energy and food prices. The UN’s Food and Agriculture Organization (FAO) price index fell 20 percent from its high a year ago, but that drop has not translated into similar declines in most supermarkets for most consumers.
“We expect year‑end‑to‑year‑end core inflation to slow to 5.1 percent this year, a sizeable upward revision of 0.6 percentage points from our January update, and well above target,” Gourinchas said. He noted that labour markets—reflected in low unemployment rates—remain very strong in most advanced economies, which may require monetary policy to tighten further or stay tighter for longer than currently anticipated. He remains “unconvinced” that there is a big risk of an uncontrolled wage‑price spiral, as nominal wage gains continue to lag behind price increases, implying a decline in real wages.
More worrying, he said, are the side effects that the sharp interest‑rate rises of the past year are having on the financial sector, “as we have repeatedly warned might happen. Perhaps the surprise is that it took so long.” After a prolonged period of muted inflation and low interest rates before the global shocks of COVID‑19 and the Ukraine war, the financial sector had become too complacent. The brief instability in the UK gilt market last autumn and the recent banking turbulence in the US underscore that significant vulnerabilities exist among both banks and non‑bank financial intermediaries. In both cases, financial and monetary authorities acted quickly and strongly, preventing further instability.
Gourinchas concluded by warning that a sharp tightening of global financial conditions due to a “risk‑off” event—when investors rush to safety and sell assets—could dramatically impact credit conditions and public finances, especially in emerging‑market and developing economies. Such a scenario would trigger large capital outflows, a sudden increase in risk premia, a dollar appreciation, and major declines in global activity amid lower confidence, household spending, and investment. In that event, growth could slow to just one percent this year, implying near‑stagnant per‑capita income. However, he estimates the probability of such an outcome at about 15 percent.
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